High Probability Trading with CFDs

Many traders are seeking high probability trading strategies for trading CFDs. The attraction of these strategies is obvious as the more often a strategy is correct, the easier it is to trade.

It is not necessary to endure long periods of losing trades, drawdown in account balances is less and the leverage of CFDs does not have the same impact on an account.

However traders seeking high probability trading strategies may be missing the whole point of trading.

“Its Not About Being Right”

It is not just the win% that makes a trading strategy work, it is a combination of the win% and the risk reward. Looking at only one of these measures in isolation is a sure way to fail.

Assuming you had developed a strategy that was right on 95% of the trades. When it won it made an average of $100. If you were to make 100 trades you would expect to make $9,500 on the winning trades. Do not forget the losing trades however.

On the losing trades if the average loss is $2,500 then overall it will lose $12,500 from 100 trades. This strategy is not profitable even with a win% of 95%. It is important to remember that both numbers, risk reward and win%, need to be considered together.

“You Will Still Have Losses”

The strategy that is often used to get high probability trading strategies is to use wide stop losses and small profit targets.

So for a while the strategy appears to work well, until it gets hit with a number of very large losses. To reduce the size of the loss it is necessary to tighten the stop, but this typically reduces the success rate of the strategy.

Find the Balance

Back testing can be used to determine the optimal balance between risk and reward and the win%. Try testing a variety of different stop loss levels to determine the best outcome for risk reward and win%.

In my own trading I have tested a variety of chart pattern breakouts. The best trades breakout and keep going in the direction of the move. Because of this tight stops work well with chart pattern breakouts as they improve the risk reward results. Profit targets on the other hand improve the win%, but actually reduced the overall profitability.

“It Is About Making Money, Not Being Right”

A trend following strategy is right around 30% of the time, but when it does win it wins big, with a risk reward of 3 or more. This is a profitable trading strategy.

A short term scalping strategy that wins 70% of the time with a risk reward of 1:1 is also profitable.

When assessing trading strategies it is not about being right, but about making money that is important. High probability trading strategies may or may not deliver you this result.

Related Posts:

1. High Probability Trading Strategies Using CFDs
2. Day Trading CFDs
3. Share Trading Tips – CFDs
4. Day Trading Profit Secrets – CFDs Contracts For Difference
5. Introduction to Day Trading CFDs
6. 3 Essentials Rules to have CFD Trading Success
7. Do CFDs Suck?